By Tiernan Ray

Shares of VMware (VMW) are higher by $2.56, or 2.5%, at $99.92, after the company this morning said it will spend $1.2 billion in cash, plus $365 million in supplementary installment payments, to buy startup AirWatch, which develops software to let IT manage mobile devices, including Apple’s (AAPL) iPhone and smartphones running Google’s (GOOG) Android software.

The company also reported preliminary financials for Q4, which it doesn’t formally report until January 28th. The company said revenue was $1.48 billion last quarter, up 15%, and slightly ahead of the $1.47 billion average estimate of analysts.

The company said on a call following the news release that its outlook for revenue growth this year goes to 16% from 15% to include about $75 million of AirWatch revenue. VMware is now targeting a growth rate of 16% to 20% over 2015 and 2016, respectively, which is up from a prior outlook for 15% and 20%.

AirWatch had more than $100 million in software bookings last year, among the stats cited by VMware on the call.

CEO Pat Gelsinger was kind enough to spend a few minutes by phone talking about the deal this morning. AirWatch is the “clear leader,” he contends, in a market of several contenders, including BlackBerry (BBRY), Citrix Systems (CTXS), privately held Good Technology, and startup MobileIron. As evidence of that, he cited AirWatch having 10,000 customers, including 9 of the top 10 retailers, such as Best Buy (BBY), and Walgreen’s (WAG); he also noted the company is at the top of Gartner’s “Magic Quadrant” analysis that is often used to rank companies in various tech categories.

Shares of Citrix are down 69 cents, or 1%, at $60.80.

I asked about BlackBerry, which is repositioning itself under CEO John Chen to focus more on enterprise software, and less on sales of devices. But Gelsinger said that “the idea of bring-your-own-device” is enabling multiple devices; nobody believes they [BlackBerry] have built the capabilities to support this broad set of devices.” (For more background on the market, see my Technology Trader column in Barron’s print magazine from last year.)

When I asked about Gelsinger’s intent to continue the acquisition path, and he was resolute about there being lots of opportunities.

“We will continue to do organic and inorganic investments, but we are not going to stop our acquisition strategy.”

“The industry is making this violent, tectonic shift from client-server [computing] to a mobile and cloud era.”

“The priorities for IT are mobile, cloud, and security, and our strategy is to be well-positioned, uniquely capable in those areas.”

The Street this morning likes the deal, bringing the VMware bulls out of the woodwork.

Mizuho U.S. Equity Research’s Abhey Lamba reiterates a Buy rating on VMware shares, and a $110 price target, writing that the deal is “a net positive,” and that “As expected, VMW beat consensus for 4Q13 and guided 2014 relatively in-line with consensus after adjusting for AirWatch.”

This market is still in early stages, he writes:

Although AirWatch is significantly dilutive in the near-term due to its revenue model and needs for investment, we think it is a function of the market being in early stages and should drive significant growth over the longer term as is indicated by management’s decision to raise the low-end of its 2015-16 growth outlook. Lastly, while acquisition also implies increased competition for CTXS, we believe the market is large enough to allow multiple players to thrive.

FBN Securities’s Shebly Seyrafi reiterates an Outperform rating on VMWare, and a $115 price target, writing that the deal is a “slight negative” for Citrix:

The AirWatch acquisition pits VMW even more against arch-competitor CTXS (which has competed quite well against VMW in virtual desktop). CTXS closed its acquisition of mobile MDM company Zenprise in early 2013 (CTXS now sells Zenprise’s product as XenMobile), and VMW is now countering with AirWatch. According to Gartner, AirWatch is big with airlines, pharmaceuticals, energy, and retail customers.

Seyrafi also notes that the new forecast for this year and the next two is slightly concerning, as it implies some downside to prior forecasts:

Shares could come under pressure today as the company is lowering its F2014 NG operating margin guidance by ~300bp to ~31% from ~34% before as it makes additional investments in AirWatch (note that it would have retained its F2014 NG operating margin guidance of 34% for the standalone VMW part). Still, VMW does expect AirWatch to be accretive at the end of F2015. Also concerning […] . Note that the midpoint of F2014 revenue guidance is $6.02B, and this includes $75M of AirWatch revenue. Therefore, standalone VMW is guided to have revenue of $5.945B (again, using the midpoint), which would be up 14.2% Y/Y (below the prior 15-20% guidance). Still, this growth rate would have been 14.6% (rounds to 15%) had the midpoint of the $1.45-$1.48B revenue guidance (or $1.465B) been achieved in FQ4. However, since the company just issued a positive preannouncement, it does have a slightly more difficult compare next year.

Regarding BlackBerry, Evercore’s Mark McKechnie, who writes that he has “been tracking and writing about AirWatch for the past several years,” reiterates an Equal Weight rating on BlackBerry stock, and a $7 price target, writing that AirWatch’s programs are more “open,” even though they can’t fully manage the BlackBerry handset itself. He thinks the deal makes AirWatch more of a threat to BlackBerry’s “BES” management software, which he views as a business in decline:

We have long viewed AirWatch as truly open player as it does not produce its own handsets. Thus smart phone vendors such as Samsung [Electronics (005930KS)] which is partnered with AirWatch for its SAFE (Samsung Android for Enterprise) and super secure Knox program and others are less threatened and thus more open to cooperation than with BBRY with which they have an inherent competitive conflict. We note the one “hole” is with BBRY devices which according to our checks do not offer visibility / transparency to AirWatch’s MDM platform and thus may actually prove less secure when run by an enterprise which uses the AirWatch solution […] We view the broader go-to-market platform of VMWare / AirWatch as a much larger threat to BBRY which we believe will accelerate the relegation of BBRY to a high-end niche supplier to enterprises with advanced security and/or regulatory requirements […] We estimate growth on the order of 50% / year for AirWatch going forward and potentially more with the VMW synergies. Conversely, we value BBRY’s Enterprise Services business at ~ $1.1B based on an assumption that the business declines to ~ $1.26B annually at 15% operating margins based on 35M subscribers (down from ~ 65M currently).

There's no denying that Chen has had a magic touch on the stock. How can it not continue going up when he's pointed out he needs two more years and until then don't expect much. Plus. He's using a scorched earth policy. Gone is any sentiment or mentality re the iconic brand, Canada or foolish ambitions.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.